Although lifecycle funds have been the darlings of the benefits media over the past several years, some experts say the biggest innovations in capital accumulation plan investing are balanced funds "with attitude" that better respond to members' specific needs and desired outcomes.

Matthew Rotenberg, senior consultant, communications, group savings and retirement marketing, with Standard Life, told participants at the recently held Canadian Benefits Summit that "what we are back to is essentially the old balanced funds, but they are 'with attitude'. They do a lot more. They actually lifecycle for the member and rebalance."

Peter Arnold, national investment practice leader at Buck Consulting, explained that "from a plan sponsor perspective they are a little different, in that they are made up of individual investment funds instead of the one unitized fund so benchmarking is simplified. Governance is also a lot easier and you can pull funds out and put funds back into these mixes, and so forth."

Where we've been

To put this new form of balanced fund in context, the presenters highlighted the evolution of defined contribution investment trends.

>> In the 1980s a typical balanced fund managed by an insurance company was a diversified fund with the asset allocation determined by a committee. A typical split might be 55% equities and 45% fixed income. "Once these became popular, that's where the majority of assets went," Rotenberg says.

>> By the mid 1990s, primarily as a result of automation, members were given the choice of multiple asset classes with multiple managers. "What happened with the introduction of these multiple managers is plan sponsors thought they were diversifying," Arnold comments. "But more was not necessarily different."

>> In 2000, the industry came up with lifestyle funds essentially based on the member's capacity to take certain risks. However, Rotenberg points out that lifestyle funds did not account for the number of years until retirement and since they were bundled, they were very difficult for plan sponsors to benchmark.

>> Lifecycle or target date funds gained popularity in Canada around 2005, because they take into account the member's number of years until retirement. This presented the reverse of the lifecycle situation because they did not take into consideration members' tolerance for risk.

Where we are going

The latest generation of balanced funds works off a matrix that allows for both the investor's profile and time horizon. There are 15 different portfolios, but the building blocks consist of only five funds which cover off the full range of asset classes and manager styles.

As these portfolios are actually made up of individual funds and each one of these funds has a specific benchmark, they become visible, Rotenberg says. "What these funds also do is rebalance automatically two to four times a year. As members age, the program automatically moves them through the boxes which include a more conservative asset mix."

Overlay on top of this a monitoring aspect that takes the guesswork away from members and members have in their possession a very powerful investment tool. "Communication to members is actually quite simple, the investment approach is transparent and can actually immunize members from making the wrong decision," Arnold notes.

Rotenberg agrees. "The group retirement plan is only looking at a small piece of the member's financial pie. Instead of trying to customize and tailor a solution for each member of a DC plan, we let a solution based on age and risk tolerance do the work for them. That's really all the guidance we should be providing."

Understanding the governance structure

A consideration of the governance platform of a typical multimanager governance portfolio versus a balanced fund with attitude helps to illustrate differences in both the plan sponsor and member decision-making process.

In both cases the program operates under the auspices of an independent governance committee. This provides a measure of comfort and transparency to the process.

It is the responsibility of the committee to establish the rules governing the program, set the criteria for entering (and exiting) and to hold managers accountable for meeting all commitments. They are of course, also responsible for reporting to plan sponsors and members on a regular predetermined basis and for ensuring a protocol is in place to handle ad hoc communications.

Within the program it's important to diversify across the entire spectrum of manager styles, sectors, geographic regions, and also between retail and institutional funds. Once a manager is chosen, after a due diligence review, the manager is responsible for regular reporting of not only returns but also any qualitative information that may be material to the operation of the fund. It is based on this reporting that the governance team can make decisions.

In older models of this governance approach, the plan sponsor then chose the funds for their particular DC program from amongst the funds within the governance program. These fund choices were communicated to members who in turn chose from among the funds the sponsor had selected.

In the new model, seen on the right, the plan sponsor does not need to make any decisions. The choice of funds is pre-selected and monitored. Plan sponsors agree in advance that any changes to fund managers and funds, such as substitutions, will be at the sole discretion of the governance committee.

The offer to members is just as transparent and simple. They can choose from an à la carte selection of the funds, or a specially designed asset allocation model. Whether they choose à la carte or asset allocation, they understand that their choice of fund managers and specific funds can be changed at any time and there are protocols in place to communicate this.